FINANCIAL ACCOUNTING 3

3.3 ITEMS OF CONTRACT ACCOUNT
 In order to estimate profit or loss in Contract account, more information is needed like
architect’s certificate, apparent profit, realized profit and reserve.
 There are formula in calculating apparent profit, realized profit and reserve.

(a) Architect Certificate
 The architect will visit site at regular intervals and will issue a certificate stating
his estimates of the value of work done.
 The calculation of architect certificate is as follows :

Money received from contractee x 100%
Per cent of pay received

(b) Apparent Profit RM
XXX
The apparent profit to date is calculated as follows:
XXX
Architect’s valuation of work to date XXX
(as shown on architect’s certificate)
Deduct
Cost of work certified
(Cost of work to date less cost of work not yet certified)
Apparent profit

(c) Realized Profit

2 X Value Cash received X Apparent profit
3 of Architect’s Certificate

(d) Reserve
Apparent Profit – Realized Profit

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3.4 FORMAT OF CONTRACT ACCOUNT

Table 3.2 Contract account, Profit and Loss account and SOFP

CONTRACT ACCOUNT

construction material b/d xx Unused construction xx
xx
material c/d xx
xx
Less return to supplier xx Xx Non-current asset c/d
xxx
Architect certificate

Labour wages xx Work not certified

Add Accrued wages xx Xx

Purchase of non-current asset Xx

Administrative expenses xx
Add accrued expenses xx xx
Less prepaid expenses

Subcontractors on the site xx
Other site expenses xx
Hire of special machinery xx
Realized profit xx
Reserve
xxx

PROFIT AND LOSS ACCOUNT (EXTRACT)

Depreciation – machine xx Contract account – realised profit xx

STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20XX

(EXTRACT)

Non-current Assets

Machine xx

- Depreciation xx xx

Current Assets xx
Inventory (Materials) xx xx
prepaid

Equity xx
Reserve

Current Liability xx
Accrual salary

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Example 1

Arissa Empire Enterprise was given a tender which costs RM600,000. The
project should be started on 1 January 2016. Arissa Empire Enterprise gained
a profit of RM40,000 at the end of 31 December 2016. At the end of
accounting period, the customer only made a payment of RM 380,000 while
the retention money was 15%.
Calculate the Architect certificate

Answer:
= Money received from contractee x 100%

Per cent of pay received

= RM 380,000 x 100%
85%

= RM 447, 058.82

Example 2

Tender was given to Kodiang Enterprise which costs RM700,000 which
started on 1 February 2016. Kodiang Enterprise getting a profit of
RM40,000 at the end of 30 September 2016. At the end of the accounting
period,the customer only made a payment of RM280,000 while the retention
money was 20%.
Calculate:-

a) the Architect certificate
b) the realized profit
c) the reserve
Answer:

a) the Architect certificate
Money received from contractee x 100%
Per cent of pay received

= RM 280,000 x 100%
80%

= RM 350,000

50

b) the realized profit

=2 x Cash received X Apparent profit
3 Value of Architect’s Certificate

= 2 x RM 280,0000 x RM 40,000
3 RM 350,000

= RM 21,333.33

c) the reserve
= Apparent Profit – Realized Profit
= RM 40,000 – RM 21,333.33

= RM 18,666.67

Example 3

Chanteq Group was given a tender to build a surau at Taman Pokok Mangga on
1 May 2016. The following information is related to the project.

Type Surau
Value RM300,000
Start date 1 May 2016
Completion date 1 June 2017
Company Chanteq Group
Architect Akif Consultant

The accounting period ends on 31 December every year for this company. The
expenses incurred for the project during the year ended 31 December 2016.

expenses RM
Purchase of raw materials 80,000
Direct labor wages 20,000
Direct expenses 10,000
ExampRleent4al of equipment 25,000

The value of on-site raw materials is RM28,000 at the end of accounting period.
The customer agree to pay 90% of the total project amount, without any
retention money

Prepare

a) contract account
by showing workings on

a) the Architect certificate
b) the realized profit
c) the reserve

Answer: 51

Answer

Raw material CONTRACT ACCOUNT 28,000
Labour wages 80,000 Construction material c/d 270,000
Direct expenses 20,000 Architect certificate
Rental of equipment 10,000
Realized Profit 25,000
Reserve 97,800
65,200

298,000 298,000

a) the Architect certificate
= RM 300,000 x 90%
= RM 270,000

b) the realized profit
= 2/3 x 90% x RM 163,000
= RM 97,800

c) the reserve
= Apparent Profit – Realized Profit
= RM 163,000 – RM 97,800
= RM 65,200

52

Example 4

Build Changloon Sdn Bhd and a local authority agreed to the terms and conditions
of a tender as follows;

Type Building
Value RM500,000
Start date 1 January 2016
Completion date 31 July 2017
Company Build Changloon Sdn Bhd
Architects Remy San Consultant

The company’s accounting is 31 December 2016. The raw materials on-site cost
RM72,936. Furthermore, the accrued expenses amount to RM9,740.

The expenses incurred during the year ended 31 December 2016 include:

Expenditures RM
Purchase of raw materials 270,000
Inventory of raw materials 31,000
Labor wages 127,000
Direct expenses 70,500
Administrative expenses 34,500
Purchase of machine 1/3/2016 154,500

The architect, Remy San Consultant is satisfied with the progress of the projects.
Therefore, the customer will make a payment of 90% until 31 December 2016
which amounts to RM471,000. The depreciation is charged 10% per annum, based
on straight line method.

Calculate

a) Architect’s certificate (value of work certified by the architect)

Prepare

a) the contract account and contractee account,
b) extract of profit and loss account
c) extract of statement of financial position as at 31 December 2016.

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Answer

a) the Architect certificate
= RM 471,000/90% x 100%
= RM 523,333

b) CONTRACT ACCOUNT 72,936
270,000 Construction material c/d 523,333
Raw material 31,000 Architect certificate 141,625
Inventory raw
material 127,000 Machine (W1) 737,894
Labor wages 70,500
Direct expenses 34,500
Admin expenses 154,500
Machine 9,740
Accrued expenses 24,392
Realized profit (W2) 16,262
reserve 737,894

W1 Depreciation 10/12 x RM154,500 x10%

Machine =RM12,875
RM154,500 – RM12,875

=RM141,625

W2 Realized profit 2/3 x 90% x RM40,654 = RM24,392 OR

2/3 x471,000/523,333 x RM40,654 = RM24,392

c)

Depreciation PROFIT & LOSS ACCOUNT
12,875 Contract account-realized 24,392
profit

Contract acc- AC CONTRACTEE ACCOUNT 471,000
523,333 Bank/ cash 52,333
Retention money 523,333
523,333

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STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20XX

(EXTRACT)

Non-current Assets

Machine 154,500

- Depreciation (12,875) 141,625

Current Assets 72,936
Inventory (Materials)

Equity 16,262
Reserve 9,740

Current Liability
Accrual expenses

Example 5

Fabricators Limited commenced the contract for the construction of a hotel on
1 January 2011 and in the accounting period ended 31 December 2011 the
following expenditures were incurred:-

Materials RM
Wages 20,000
Direct expenses 15,000
Administrative expenses charged to contract 3,000
Purchase of plant on 1 January 2015 6,000
25,000

The stock materials on site on 31 December 2015 amounted to RM 2,000 and
wages accrued on that date were RM 1,000. The plant was valued on 31
December 2015 at RM 20,000.

A sum of RM 40,000 had been received by the company which was the amount
for work completed to 31 December 2015 less 20% rentation money, as
certified by the architects.The cost of work not certified amounted to RM 2,000.

You are required to prepare:

a) Calculation of the value of work certified
b) Contract account

55

Answer

a) cost of work certified
= cost of work to date – cost of work not yet certified
= total of work/expenditure to date – cost of work not yet certified

= RM70,000- RM24,000

= RM46,000

b) the Architect certificate
= RM 40,000/80 x 100%
= RM 50,000

c) CONTRACT ACCOUNT 2,000
20,000 Stock material 20,000
Material 16,000 Plant c/d 2,000
Wages 6,000 Work not certified 50,000
Admin expenses 3,000 Architect Certificate
Direct expenses 25,000 74,000
Purchase of plant 2,133
Realized profit W1 1,867
reserve 74,000

W1 Realized profit 2/3 x 80% x RM4000 = RM2,133 OR
2/3 x40,000/50,000 x RM4,000 = RM2,1333

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QUESTIONS

Part A : Problem Question

1. Que Puteh Enterprise obtained a tender which costs RM800,000 which started on 1 January
2016. The company was getting a profit of RM60,000 at the end of 31 December 2016.
The customer only made a payment of RM300,000 At the end of the accounting period.
While the retention money was 20%.

Calculate
a) the Architect certificate

2. Sanglang Sdn Bhd and a local authority agreed to the conditions as stated in a tender.

Type Shop lot
Value RM500,000
Start date 1 January 2016
Completion date 31 January 2017
Company Sanglang Sdn Bhd
Architects SS Solution Consultant

The accounting period for Sanglang Sdn Bhd ends 31 December. The following expenses
incurred during the year ended 31 December 2016.

Raw materials RM
Direct expenses 70,000
Labour costs 15,000
Machine (bought on 1 January 2016) 20,000
Overhead expenses 80,000
Supervisor salary 6,000
Subcontracts 20,000
30,000

Depreciation for the machine was 10% per annum using straight line method. The local
authority was paid 90% from the cost of the project and the retention money was
RM30,000.

Prepare

a) the contract account and contractee account,
b) extract of profit and loss account
c) extract of statement of financial position as at 31 December 2016.

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3. Skylars Ltd is contractors for the building in Kg Baru, Kuala Lumpur. The value of
the contract is RM400,000 and the payment is by architect’s certificate subject to
retention of 10% of the amount certified.
The following information is extracted from the records of Skylar Ltd at the end of
the accounting period 31 December 2016.

Wages on site RM
Materials delivered to site by supplier 41,260
Materials deliver to site from store 58,966
Hire of plant 10,180
Expenses charged to contract 21,030
Wages accrued 3,065
Overheads charged to contract 2,826
Materials on site 31 December 2016 8,330
Work certified/Architect Certificate 11,660
Payment received 150,000
Cost of work not certified 135,000
12,613

Prepare

a) Calculation of the value of work certified
b) Contract account based on the details above

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Part B : Question

Question 1

Ranhill Sdn Bhd was offered to build a condominium that worth RM1.5 million at Cyberjaya,
Selangor. The construction will be started on 1 July 2015 and expected to be completed by
2018.
The following information is related to the tender which ends 30 June 2016.

Materials RM
Materials from the store
Purchases of raw materials 70,000
30,000

Labour Wages rate
Skilled RM80 per day
Semi skilled RM50 per day

Months Number of working days
July 26
August 26
September 26

Overhead RM
Administration expenses 20,000
Payment to subcontractor 40,000

Assets RM
Machine (bought on 1 August 2015) 60,000

Additional information
i. The accounting period ends 30 June every year
ii. Materials that were not used by 30 June 2016 was RM8,000

iii. The depreciation is 10% per annum for machine
iv. The payment by contractee was RM430,000 to Ranhill Sdn Bhd after deducts the

retention money of 15%.
v. Wages to be paid to labour is based on the number of working days

Prepare

a) the contract account
b) contractee account,

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Question 2

Encik Helmy appointed Saujana Alam Sdn Bhd to build a bungalow on his land at
Senawang, Negeri Sembilan. The details of contract is as follows;

Type Bungalow
Value RM400,000
Start date 1 October 2015
Completion date 30 November 2016
company Saujana Alam Sdn Bhd
architects MFT & Co

Acounting period for Saujana Alam Sdn Bhd ends 30 April every year. The expenses
incurred is as follows:

Direct expenses RM
Labour wages 30,000

Workers 55,000
Supervisors 36,000
Raw materials 80,000
Rental of equipment 40,000
Machine (bought on 1 October 2015) 75,000
Overhead expenses 28,000
Subcontract 42,000
Miscellaneous expenses 12,000

On 30 April 2016, the raw materials not used was RM10,000. The prepaid overhead expenses
was RM1,000.The depreciation for a machine bought on 1 October 2015 was calculated using
the straight line method at 10% per annum.Encik Helmy release payment 80% from the total
cost to Saujana Alam Sdn Bhd. However, Saujana Alam Sdn Bhd received only 75% of the
payment.

Calculate

a) Architect’s certificate (value of work certified by the architect)
b) Realized profit & reserve

Prepare

c) the contract account and contractee account,
d) extract of profit and loss account
e) extract of statement of financial position as at 30 April 2016.

60

Question 3

Humayraa Construction, a building contractor company was awarded a contract to build a
bungalow at Seremban 2,Negeri Sembilan. The construction work started on 1 July 2015 and
is expected to be completed within 2 years. The information relating to the contract is given
below :

Contract price RM
Raw materials 300,000
Direct costs 15,000
Overhead 5,000
Subcontract 4,000
Wages 7,500
Machine (bought on 1 July 2015) 5,500
Vehicle (bought on 1 January 2016) 85,000
Other expenses 60,000
3,400

Additional information:

i. On 30 June 2016, the amount of raw materials on site was RM4,000.
ii. Machine is depreciated at a rate of 20% per annum and vehicle is depreciated at a rate

of 10% per annum using a straight line method.
iii. The amount received by the contractor for work completed was RM120,000 which

represented 80% of the work approved. Profits are calculated based on 2/3 of the
amount received from the work certified.

You are required to prepare:

a) Contract account for the year ended 30 June 2016
b) Statement of financial position (extract) as at 30 June 2016

61

Question 4

Rel Construction had obtained a tender to build a warehouse for CT Power Berhad.

The following information relates to the project.

Type Warehouse
Value RM900,000
Start date 1 January 2016
Completion date 30 June 2017
Company Rel Construction
Architect A&A Architecture

the accounting period for the company ends 31 December every year. the following are the
expenses incurred during the year ended 31 December 2016.

Expenses RM
Purchase of raw materials 400,000
Direct labor wages 150,000
Direct expenses 70,000
Equipment rental 42,000

The value of on-site raw materials is RM90,000 at the end of the accounting period. The
customer agree to pay RM600,000 which reflected the 80% of the completion of the project
value

You are required to

1) Calculate
i. apparent profit
ii. realized profit

iii. reserve

2) prepare contract account based on details above

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CONSIGNMENT

ACCOUNTS AND BILL

OF EXCHANGE

Learning Outcomes

At the end of this chapter, students should be able to:
 Explain the nature of a consignment business
 Explain the characteristics of a consignment business
 Differentiate between consignment business and normal business
 Prepare a consignment accounts in consignor’s book
 Prepare a consignment accounts in consignee’s book

4.0 INTRODUCTION

 Consignment is an agreement between an owner and a
third-party consignee whereby the consignee agrees to
sell the owners goods in exchange for a fee.

 Consignment is an arrangement in which an item is
placed in the care of another until purchased by a buyer.
Until the item is sold, the consignor still claims
ownership and is still responsible for anything that may
happen to the item while it is in the care of the consignee.

 A business entity which sends the goods is called
consignor and the agent who receives the goods is called
consignee. The goods sent to the consignee is called
consignment.

For example,
 Ummu Haidah consigns his antique vases to Amir Ukays, who offers to sell it for him

at his shop. Ummu Haidah (the consignor) despatch some goods to the Amir Ukays
(the consignee) together with pro-forma invoice. One days, the customer purchases
the antique vases from Amir Ukays’s shop. Amir Ukays gives the proceeds to Ummu

63

Haidah, and as a return Amir Ukays will get a certain amount of commission as agreed.
(see Figure 4.1)

Ummu Haidah Amir Ukays Customer
Enterprise (consignee)
(consignor)
Agent
Owner

Consignment Sales
(antique vases)

Figure 4.1 Consignment process
 Consignor will pay all expenses that need to be incurred at its place in despatching

goods such as transport charges, insurance, wages, and etc.

 Consignee will pay all necessary expenses at his place such as transport charges,
storage cost, advertising charges and distribution cost.

 Consignee allowed to sell goods on cash and credit.

 The damages, spoilage, normal and abnormal losses are borne by the consignor because
in a consignment sale only the possession of goods is transferred to the consignee
whereas the title of goods lies with the consignor.

4.1 DIFFERENTIATE BETWEEN CONSIGNMENT BUSINESS AND NORMAL
BUSINESS

 Consignment - arrangement goods are sent to the agent by the owner, and then he sells
them on behalf of the owner. Sale - a transaction between two parties in which the
goods are transferred from seller to buyer for money consideration. Consignment is also
a kind of sale. Many differences between consignment and sale, which we are going to
discuss. (see table 4.1)

64

Table 4.1 Differentiate between consignment business and sales business

Sale Consignment
1 Transfer of ownership from seller to 1 No transfer of ownership

buyer 2 Principal and Agent
2 Creditor and Debtor 3 Goods sent continue to be property of
3 Goods sold cannot be returned
consignor
4 Buyer bears loss of goods after 4 Consignor bears the loss of goods even
delivery
after delivery
5 Expenses incurred by the buyer for 5 Expenses of consignee for safeguarding
safeguarding the goods are his own
the consignment are borne by consignor

4.2 CHARACTERISTICS OF CONSIGNMENT

The characteristics of a consignment before preparing the related accounts of the
consignment. Table 4.2 defines consignment characteristics.

Table 4.2 Characteristics of Consignment

Consignment Arrangement goods are sent to the agent by the owner, and then he
sells them on behalf of the owner

Consignor The person who forwards the goods for sale

Consignee The person who acts as the sales agent

Pro-forma The consignor is able to send the goods to consignee under cost price
invoice or pro forma price. Pro forma price is the price that is stated in the
sales invoice.

Del credere When the consignee sells goods on credit, the purchaser becomes the
commission debtor of the consignor. If the debtor defaults in payment, it is the
consignor who bears the loss. The extra commission paid to such an
agent is called a Del credere commission.

Account of sales This statement shows the particulars of goods sold, the gross proceeds,
the various expenses and charges and the net balance owing to the
consignor.

65

4.3 ACCOUNTING PROCEDURES

Accounting procedures for a consignment business are recorded differently in the
consignor and consignee books.

4.3.1 BOOKS OF THE CONSIGNOR

The consignor’s books will show the profit or loss on each consignment. The
following accounts are normally required:

a) Consignment Account
b) Consignee’s Account
c) Goods sent on Consignment Account

Consignor’s Books

Consignment Account

Goods sent on Consignment xxx Cash sales xxx
Credit sales xxx
xxx
Expenses incurred by : Goods on consignment- return xxx
Consignee Claim on insured goods that xxx
Consignor xxx were lost xxx
xxx Withdrawals
xxx
Commission on sale xxx Stock c/d:
Profit and Loss Account Unsold goods valued at cost
plus proportionate expenses

xxx

xxx

Cash sales Consignee’s Account xxx
Credit sales xxx Expenses incurred by :
Insurance claim xxx Consignee xxx
xxx
Withdrawals xxx Commission on sale xxx
Remittance
Advance payment xxx

xxx Bank Payment (Settlement) xxx

xxx

66

Goods Sent on Consignment Account

Purchases Account Consignment Account: xxx
Consignment Account: xxx Cost of goods sent xxx
Return
xxx RM
xxx xxx

Format : Sales Statement (xxx)
xxx
Sales Statement xxx

Sales RM xxx
Less : Expenses by consignee
xxx xxx
Charges and expenses xxx
Transport xxx xxx
Storage xxx
Insurance xxx
Commission : Ordinary xxx

Del credere xxx

Less : pre-payment
Bank draft

The entries should be as follows: xxx
Debit Consignment Account xxx
Credit Goods sent on Consignment Account xxx

(Cost of goods sent on consignment)
Debit Consignment Account
Credit Cash Account or relevant personal account

(Expenses paid or payable by consignor)
Debit Consignment Account
Credit Consignee’s Account

(Expenses paid by consignee)

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On receipt of Account Sales xxx xxx
a) Where credit sales are subject to a Del credere agreement: xxx xxx
Debit Consignee’s Account
Credit Consignment Account xxx
xxx
(Gross proceeds of cash sales) xxx
Debit Consignment Debtors Account xxx
Credit Consignment Account xxx

(Credit sales)

c) Where cash sales are collected by consignee. xxx
Debit Consignee’s Account xxx
Credit Consignment Debtors Account xxx
(Cash collected by consignee from consignment debtors) xxx
Debit Consignment Account xxx
Credit Consignee’s Account
(Commission due to consignee on sale)
Debit Consignment Account
Credit Profit and Loss Account
(Profit on consignment for the period)
Debit Cash/ Bills Receivable Account
Credit Consignee’s Account
(Cash or bill receivable in settlement)
Debit Goods sent on Consignment Account
Credit Purchase Account
(Cost of goods sent on consignment for the period)

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Example 4.1

On 21 April 2016, Akif consigned to his agent Ariani, 90 sewing machines which cost
RM 150 each and on 25 April 2016 he paid freight and insurance charges amounting to
RM 800 for goods consigned. Ariani is entitled to a commission of 10% on gross sales.

On 30 June 2016 Ariani sent the Account Sales for the year to Akif together with the
bank draft for the balance due so that Akif can close his accounts on 31 December 2016,
closing date of his accounting year. It showed that Ariani had sold 40 units for RM
20,000 and paid the following expenses:

Transport charges RM
Warehouse charges 100
Return freight & insurance 210
Carriage inwards 150
80

You are required:

a. Record the transaction in the following accounts in the books of Akif
(Consignor) and make closing entries in those accounts:
a. Consignment to Ariani account
b. Goods on consignment account
c. Ariani (Consignee ) account

Solution
Consignor’s Books

Consignment to Ariani Account

Goods sent on Consignment 13,500 Sales 20,000

Expenses incurred by 800 20,000
Consignor: by
Freight & Insurance 100 69
Expenses incurred 210
Consignee: 150
Transport charges 80
Warehouse
Return freight & insurance
Carriage inwards

Commission on sale 2,000
(RM20,000x10%)
Profit and Loss Account 3,160
20,000

Ariani (Consignee) Account

Sales 20,000 Expenses incurred by
Consignee:
Transport charges 100
Warehouse 210
Return freight & insurance 150
Carriage inwards 80

Commission on sale 2,000

Bank Payment (Settlement) 17,460
20,000 20,000

Goods Sent on Consignment Account

Purchases Account Consignment Account: 13,500
13,500 Cost of goods sent 13,500

13,500

Sales Statement RM RM
20,000
Sales 100
Less : Expenses by consignee 210 (2,540)
150 17,460
Transport charges 80
Warehouse 2,000
Return freight & insurance
Carriage inwards
Commission on sale

Bank draft

70

4.3.2 BOOKS OF THE CONSIGNEE

On receipt of the consignment, the consignee makes a memorandum record of
quantities, but does not record their value in his ledger. However, he opens an account
in the name of the consignor to which he debits all the expenses, which he incurs in
connection with the consignment, together with his commission on sales.

The balance on the Consignor’s account at the end of the period represents the net sum
due from the consignee to the consignor, and may be settle by payment or carried
forward to the next accounting period.

Consignee’s Books

Consignor Account

Expenses incurred by : Cash sales xxx
Consignee xxx Credit sales xxx

Commission on sale xxx Insurance claim xxx
Remittance xxx xxx
Advance payment xxx
Bank Payment (Settlement) xxx Withdrawals

xxx xxx

The consignor account in the books of the consignee will have the same balance as the
consignee account in the consignor’s book, but on the opposite side of the ledger.

The entries should be as follows: XXX
Debit Consignor’s Account
Credit Cash Account XXX

(Expenses paid by consignee) XXX
Debit Cash or Debtor’s Account
Credit Consignor’s Account XXX

(Sale made by consignee) XXX
Debit Consignor’s Account
Credit Commission Receivable Account XXX

(The amount of commission due to consignee) XXX
Debit Consignor’s Account

Credit Bill Payable Account XXX

(Remittance of balance due to consignor by bill of exchange)

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Example 4.2

Using the previous example 4.1, the ledger accounts in Ariani’s Books would appear
as follows:

Solution
Consignee’s Books

Akif (Consignor) Account

Expenses incurred by Credit sales 20,000
Consignee: 20,000
Transport charges 100
Warehouse 210
Return outward 150
Carriage inwards 80
Commission on sale
Bank Payment (Settlement) 2,000
17,460
20,000

4.4 VALUATION OF UNSOLD STOCK ON CONSIGNMENT

 Value of stock with consignee should include not only original cost price of the

goods paid to suppliers but also all other attributable costs incurred in bringing the
goods to the present location and condition (consignee’s place).

 Attributable costs are costs incurred by the consignor in deliver the goods to the
consignee’s place and costs incurred by the consignee in bringing the goods from

port to his warehouse/storage place.

 Even though the goods are physically in the premises of the consignee, the consignor
holds the entitle to the goods. Thus, goods on consignment, even though held by the
consignee, should not be included in the physical inventories of the consignee.
(MFRS, 102-4-1)

 Warehouse, Insurance, delivery, holding, storage, carrying, carriage inward are
expenses incurred in bringing the goods to present location and condition for
calculate value of stock with consignee.

Attributable costs incurred are for total goods sent or received. They should be
apportioned between those goods sold and those in stock proportionately as follows:

If quantity of goods is known,

Consignor = Total costs x ( Quantity in stock / Total quantity sent )

Consignee = Total costs x ( Quantity in stock / Total quantity received )

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If quantity of goods is not known,
Consignor = Total costs x ( Cost price of stock / Total cost price of good sent )
Consignee = Total costs x (Cost price of stock / Total cost price of good received)

Example 4.3

The following information relate to the transactions with Consignee Azizah during the
year 2016:

Total goods sent at cost RM
Transport charge paid by the consignor 40,000
Insurance premium paid by the consignor 2,000
Expenses paid Azizah (Consignee) :
Custom duties 400
Rent warehouse
Advertising charge 1,200
Carriage outwards 800
Closing stock with Azizah at cost 500
200

13,000

Required : Calculate value of closing stock with Azizah (Consignee)

Solution

Calculation of value of stock on consignment with Azizah

Cost price of stock RM RM RM
Add : Expenses by the 13,000
consignor 2,000 (2,400 x 13,000/40,000)
400 (2,000 x 13,000/40,000) 780
Transport charge
Insurance 1,200 Total value of stock 650
Add : Expenses by the 800 14,430
consignee
Custom duties
Rent warehouse

Explanatory note

Advertising charge and carriage outwards are not expenses incurred in bringing the
goods to the present location and condition. They are distribution expenses. Hence they
are not included in the value of stock.

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Example 4.4

On 21 April 2016, Akif consigned to his agent Ariani, 90 sewing machines which cost
RM 150 each and on 25 April 2016 he paid freight and insurance charges amounting to
RM 800 for goods consigned. Ariani is entitled to a commission of 10% on gross sales.

On the way to Ariani 2 units were lost. Out of 88 units received by Ariani on 24
April 2016, 3 units were found to be with some defects and they were immediately
returned to Akif.

On 30 June 2016 Ariani sent the Account Sales for the year to Akif together with the
bank draft for the balance due so that Akif can close his accounts on 31 December 2016,
closing date of his accounting year. It showed that Ariani had sold 40 units for RM
20,000 and paid the following expenses:

Transport charges RM
Warehouse charges 100
Return freight & insurance 210
Carriage inwards 150
80

You are required:

i. Calculate the value of stock on consignment with Ariani on 31 December 2016;
and

ii. Record the transaction in the following accounts in the books of Akif (Consignor)
and make closing entries in those accounts:
a) Consignment to Ariani account
b) Goods on consignment account
c) Ariani (Consignee ) account

Solution

Working value of closing stock consignee

Total units sent 90
Less: Units lost 2
3
Units returned 40 45
Units sold
45

Calculation of value of stock on consignment with Ariani

RM RM
6,750
Cost price of stock (45 x RM 150)

Add : Expenses by the consignor

74

Freight and insurance 800 (RM 800 x 45/90) 400

Add : Expenses by the consignee

Transport charge 100 (RM 540 x 45/88) 276.14

Warehouse charges 210

Carriage inwards 80

Return freight & insurance 150

Total value of stock 7,426.14

Working claim insurance 300

Cost of 2 unit lost (amount of insurance claim) 17.78
Cost of 2 units (RM 150 x 2) 317.78
Add : Expenses by the consignor

Freight (RM 800 x 2/90)

Consignor’s Books

Consignment to Ariani Account

Goods sent on Consignment 13,500 Sales 20,000
Goods on consignment 450
returned –
(RM 150 x 3)

Expenses incurred by Claim on insured goods that 318

Consignor: 800 were lost

Freight

Expenses incurred by

Consignee:

Transport charges 100

Warehouse 210

Return freight & insurance 150

Carriage inwards 80

Commission on sale 2,000 Stock c/d: 7426
(RM20,000x10%) Unsold goods valued at cost 28,194
11354 plus proportionate expenses
Profit and Loss Account 28,194

Ariani (Consignee) Account

Credit sales 20,000 Expenses incurred by
Consignee:
Transport charges 100
Warehouse 210
Return freight & insurance 150

75

Insurance claim 318 Carriage inwards 80
20,318 Commission on sale 2,000
Bank Payment (Settlement) 17,778
20,318

Goods Sent on Consignment Account

Goods on consignment – 450 Consignment Account: 13,500
returned 13,050 Cost of goods sent 13,500
Purchases Account

13,500

Sales Statement RM RM
20,000
Sales 100
Less : Expenses by consignee 210 (2,540)
150 17,460
Transport charges 80
Warehouse 2,000
Return freight & insurance
Carriage inwards
Commission on sale

Bank draft

4.5 BILLS OF EXCHANGE

 A bill of exchange is ‘an unconditional order in writing, addressed by one person
to another, signed by the person giving it, requiring the person to whom it is
addressed to pay on demand or at a fixed or determinable future time a sum certain
in money to or to the order of specified person or bearer’ (Bills of Exchange Act
1882)

 A bill of exchange is essentially an order made by one person to another to pay
money to a third person. A bill of exchange requires in its inception three parties—
the drawer, the drawee, and the payee.

 The person who draws the bill is called the drawer. He gives the order to pay money
to the third party. The party upon whom the bill is drawn is called the drawee. He
is the person to whom the bill is addressed and who is ordered to pay.

76

QUESTIONS

Part A : Problem Question

Exercise 1

At 15 February 2016, Fadill consigned goods under consignment to Fairuz at Johor Bahru, has
sent 500 pieces of vases with the cost price at RM 5 each Below are the expenses incurred by
consignor and consignee for the year ended 31 December 2016:-

Consignor expenses: Insurance RM 50, packaging RM 20 and Freight expenses RM 30

Consignee expenses: Transportation expenses RM 50, Store rental RM 400 and general
expense RM 100.
Sales made by consignee: Sales – 250 pieces at RM 8.50 each. Sales commission of 5%.

You are required to prepare:

a) Consignment Account
b) Consignee Account

Exercise 2

At 01 January 2016, Samad consigned goods under consignment to Nabil at Pulau Tioman,
containing 100 boxes of mineral water. Samad paid expenses for:

i. Cost of goods RM1, 500
ii. Carriage to cost 80
iii. Insurance 40

It was agreed that Nabil will receive sales commission of 5%, delivery charges RM 3 per boxed
and port charges RM 90.

Nabil had sold 60 boxes at the price of RM 25 per boxed and 30 boxes at the price of RM27.50
per box.

Nabil sent the Sales Account and Bank Draft to Samad on 31 March 2016.

REQUIRED:

a) Prepare Sales Statement Account
b) Consignment Account
c) Nabil (Consignee) Account

77

Part B : Question

Question 1

Pak Abu is a consignor at Kuala kedah. He is the sole consignor and consigns belacan from his
village to Langkawi, Kedah. Pak Abu deals with his agent, Mak Timah at Padang Mat Sirat,
Langkawi. In the agreement, Mak Timah will receive 5% sales commission and 3% del credere
commission on sales. Pak abu has sent 500 pieces of belacan with the cost price at RM 5 each
and the invoice price at RM 9 each.

Below are the expenses incurred by consignor and consignee for the year ended 31 December
2016:-

Consignor expenses: Insurance RM 70, packaging RM 10 and Frieght expenses RM 25

Consignee expenses: Transportation expenses RM 40, Store rental RM 300 and general
expense RM 150.

Sales made by consignee : Cash sales – 250 pieces at RM 8.50 each

: Credit sales – 200 pieces at RM 9.50 each

An advance payment of RM 200 was made Pak Abu by Mak Timah after receiving the belacan.
Mak Timah took two pieces for her own with cost at RM 6.50 each.

(a) You are required to prepare:
i. Consignment Account
ii. Consignee Account

iii. Goods sent on consignment Account
(b) Calculate closing stock
(c) Describe the two types of commission that are given to the consignee

Question 2

Subramaniam is a trader dealing with computer parts. He has an agent, Suhairi Seah, in
Malaysia for distribution of his products. He pays 5% commission and 2% del credere
commission on sales made by the agents. His accounting year ends 31 December. The
following data relate to consignment to Suhairi Seah for 2016:

2011 Stock with Suhairi Seah RM
Jan 1 Goods sent at cost 42,000
Feb 5 Freight charges paid for goods sent 86,000
Insurance paid for goods sent 750
Apr 10 Defective goods returned from Suhairi Seah at cost price 540
Jun 30 Received an Account Sales for 6 months to 30 June 2016 2,800
Which provides the following information:
Sales 124,000
Expenses paid:

78

Carriage inwards 1,230

Custom duties 1,350

Storage charges 2,800

Insurance for stock 800

Carriage outwards 1,800

Transport and insurance for goods returned 300

Stock in hand at cost price 39,000

Received a bank draft for the balance owed to Subramaniam on 30 June 2016:

Required:
(i) Record the above transactions in the books of Subramaniam and close the
Consignment account; and Suhairi Seah

Question 3

Nureena is a dealer in computers in Singapore. She sells the computers in Malaysia through a
number of agents to whom goods are sent on consignment basis. The following are transactions
relating to Faizal AF who was appointed as an agent at the beginning of the year 2016:

Total goods sent to Faizal AF – 200 units at cost price RM
400,000

Expenses paid by Nureena

Transport charges 2,400

Insurance 800
Total goods received by Faizal AF – 200 units

Expenses paid by Faizal AF

Transport charges 1,200

Custom duties 400
Goods sold during the year – 160 units at sales value 384,000

Commission at 4% on sales value 15,360

On 30 December 2011 Faizal AF sent the Account Sales for the year to Nureena together with

the bank draft for the balance due so that Nureena can close his accounts on 31 December 2016,

closing date of his accounting year.

Required:
a. Calculate the value of stock on consignment with Faizal AF on 31 December 2016; and
b. Record the transaction in the following accounts in the books of Nureena (Consignor)

and make closing entries in those accounts:
i. Consignment to Faizal AF account
ii. Goods on consignment account
iii. Faizal AF (Consigee ) account

79

Question 4

a) i) Define consignment
ii) List TWO (2) differences between commissions and commission del credere.

b) Mak Cun, the owner of batik boutique at Kota Bharu has a consignment agreement with
Wan Maimunah. Wan Maimunah is an agent for batik who also owned a boutique at Kuala
Lumpur Convention Centre (KLCC). On 5 July 2015, Mak Cub has sent 250 units of her
batik goods to Wan Maimunah. The invoice is RM 650 per unit. (the cost price is RM 500
per unit).

As to consignment the goods from Kota Bharu to Kuala Lumpur, Mak Cun has incurred

the following expenses:

Transportation cost RM 1,580

Insurance RM 5,600

During consignment, 10 units of goods have missing and the insurance company is agreed

to pay the compensation which is 20% above cost of goods. On 10 July 2015, Wan

Maimunah has received the goods with additional expenses incurred as follows:

Transportation cost RM 1,800

Holding cost RM 1,560

Warehouse cost RM 1,380

On 31 July 2015, Wan Maimunah has paid RM 26,500 as an advance money and agreed
to receive 5% sales commission and 3% commission del credere. Wan Maimunah closes
her account at every 31 December. On 28 August 2015, one draft sales has been sent to
MakCun which stated:

Sales : Cash 85 units @ RM 760 each
Sales expenses Credit 40 units @ RM 820 each
Credit 65 units @ RM 900 each
RM 20 per unit sold

On 15 September 2015, Wan Maimunah has sent a draft cheque to Mak Cun to settle all
of her debt.

You are required to:

i) Compute the closing stock on 15 September 2015
ii) Prepare Consignee account

c) By using the information in question (b), prepare the Consignment Account for Mak Cun
Boutique.

80

Question 5

(a) Define the following term:
i) Consignee
ii) Del credere commission

(b) FASOLA Berhad consigned 100 packs of CONAN printer inkjet cartridges to its agent
SUMSUNG Berhad on 5 January 2014. The cost price per pack is RM 120. SUMSUNG
Berhad will receive an ordinary commission of 10% and a del credere commission of
2%.

FASOLA Berhad paid the following expenses:

Transportation RM 1,200

Insurance RM 550

The consigned cartridges received by SUMSUNG Berhad on 8 January 2014.

The expenses paid by the company including:

Insurance RM 350

Warehousing RM 600

Delivery RM 300

SUMSUNG Berhad sold the cartridges as follows:

Cash sales 30 packs @ RM 270 each

Credit sales 50 packs @ RM 280 each

On 31 January 2014, SUMSUNG Berhad sent a cheque to FASOLA Berhad for the
amount due.

You are required to prepare the Consignee Account in FASOLA Berhad.

(c) Based on question (b), prepare the Consignment Account in FASOLA Berhad.

81

BRANCH ACCOUNT

Learning Outcomes

At the end of this chapter, students should be able to:
 Understand the concept of Branch Account
 Produce accounts for branches
 Identify unrealized profit for autonomous branches
 Produce combined financial statements

5.0 INTRODUCTION
 In today’s scenario, the business expands beyond the boundaries of cities,
states, or countries.
 A trading company may try to expand its business by o
 as another establishment of the company in different locations
 The word ‘branch’ is any subordinate division of a business, subsidiary shop, office etc.
 A branch carrying the same activity as carried out by headquarters or head office.

5.1 BRANCH ACCOUNT
 Where a company organizes its sales by establishing a branch or branches in
the country, its head office either run it as a selling agency branch and or
autonomous branch.
i. Selling agency – Head Quarters (HQ) has
control over the branch

ii. Autonomous branch – the branch is given
autonomy by Head Quarter (HQ) to make
purchases directly from supplier such as
supermarket.

 The characteristics or features of these two
type of branches are tabulated as follows:
(see table 5.1)

82

 Table 5.1 Differentiate between selling agency and Autonomous Branch

Selling Agency Branch Autonomous Branch

Goods for resale are supplied by the head Goods for resale-branch outlets may
office make some local purchase
Activities are strictly controlled by the head Branch outlets may have some local
office. control over its activities
Accounting records are maintained by the Branch maintains its own accounting
head office record
Normally all instructions are from the head Branch managers are able to make
office. considerable decision.

5.2 ACCOUNTING SYSTEM FOR BRANCH
There are 2 accounting system for its branches
i. Integrated accounting system
ii. Separate accounting system

5.2.1 INTEGRATED ACCOUNTING SYSTEM

 HQ will maintain all transactions carried out by the branches in ONE ledgers
 Transactions carried out by branches will be recorded until the end

of accounting period and then submitted by the branches to the HQ.
 All the account record will be manage by Head Office.
 There are 2 approach that involved in preparing the accounts:

i. Good sent to branch at cost price
ii. Good sent to branch at selling price ( cost + mark-up)
 This approach either by cost or selling price will need a few
differences on ledger preparation.

Table 5.2.1 Accounts that will be used:

At cost price At selling price
Branch stock account Branch Stock account*(selling price)
Good Sent to the branch Good Sent to the Branch account*(at cost)
Branch Debtors account Branch Adjustment account*(mark-up)
Branch Bank account
Branch Profit & Loss account

83

5.2.1.1 Integrated Accounting Using at Cost Price

BRANCH STOCK ACCOUNT

Balance b/d – opening stock xx Good sent to branch (returned) xx
xx
Good sent to branch (good sent) xx Branch debtor (credit sales) xx
Branch profit & loss – Gross Branch bank/cash (cash sales)
xx
profit ( balancing figure) xx xx
Branch profit and loss (stock xx

Bloaslsa)nce c/d

xx

GOOD SENT TO BRANCH

Branch stock (good returned) xx Branch stock xx
xx
Trading account (HQ) xx

xx

Balance b/d BRANCH DEBTOR ACCOUNT xx
Branch stock account xx Branch bank (cheque received
from branch debtors) xx
xx Branch discount allowed xx
xx Branch Bad debt (P&L) xx
Balance c/d xx
xx

BRANCH EXPENSES ACCOUNT

Branch bank account xx Branch Profit & Loss Account xx
xx
HQ Branch account xx

xx

BRANCH PROFIT AND LOSS

Branch stock (stock loss) xx Branch stock – Gross profit xx
xx
Branch – bad debt xx

Branch – discount allowed xx

HQ Profit & Loss Account

xx

84

BRANCH BANK ACCOUNT

Balance b/d xx Branch expenses xx
xx
Branch stock(cash sales) xx HQ Bank Account (cash remit)
xx
Branch debtor(cheque received) xx

xx

Journal entries xx
xx
a) Good sent to branch at cost price

i. Goods sent to branch from HQ
Dr Branch Stock
Cr Goods sent to branch

ii. Goods returned from branch to HQ xx
Dr Goods sent to Branch xx
Cr Branch stock

iii. Branch sold goods on a cash basis xx
Dr Branch Bank/ branch cash xx
Cr Branch stock

iv. Branch sold goods on a credit basis xx
Dr Branch debtor xx
Cr Branch stock
xx
v. Branch debtor paid to branch xx
Dr Branch bank/branch cash
Cr Branch debtor xx
xx
vi. Branch’s written off bad debt
Dr Branch profit and loss
Cr Branch debtor

vii. Branch expenses paid by HQ xx
Dr Branch expenses
Cr HQ Bank xx
xx
Branch expenses paid by the branch bank account

Dr Branch expenses xx

Cr Branch bank 85

viii. Extraordinary stock loss at branch xx
Dr Branch profit and loss xx
Cr Branch bank

ix. Cash loss at branch xx
Dr Branch profit and loss xx
Cr Branch cash
xx
x. Closed good sent to branch xx
Dr Branch sent to branch
Cr Purchased (HQ) xx
xx
xi. Branch profit
Dr Branch sent to branch
Cr Profit & Loss (HQ)

Example 1

The following data were related to a branch of Chanteq Sdn Bhd for the year ended 2016.

As at 1 January 2016 RM
Branch stock at cost
Branch debtors 70,000
Branch bank balance 28,100
20,000

Transactions during the year:- 130,000
Cost of goods sent to the branch 3,000
Good returned from the branch 30,000
Cash sales at the branch
Credit sales at the branch 172,400
Cheques received from branch debtors by branch 175,100
Discount allowed to the branch debtors
Bad debts written off branch debtors 2,000
Cash remitted from the branch 500
Expenses paid at branch
Expenses paid by the HQ for the branch 173,900
Branch stock as at 31 December 2016 18,200
8,500
50,000

You are required to prepare ledgers for branch transaction in Head Office’s book.

86

Solution

BRANCH STOCK ACCOUNT

RM RM
3,000
Balance b/d 70,000 Good sent to branch(return) 30,000
172,400
Good sent to branch 130,000 Branch bank 50,000
255,400
Branch Profit & loss- gross 55,400 Branch debtor
profit RM
130,000
Balance c/d 130,000

255,400 RM
173,900
GOOD SENT TO BRANCH ACCOUNT 18,200
33,000
RM 225,100

Branch stock 3,000 Branch stock RM
175,100
Trading account (HQ) 127,000
500
130,000 2,000
22,900
Balance b/d BRANCH BANK ACCOUNT 200,500
Branch stock RM
Branch debtor 20,000 HQ bank RM
30,000 Branch expenses 26,700
175,100 Balance c/d
225,100 26,700

Balance b/d BRANCH DEBTOR RM
Branch stock RM 55,400
28,100 Branch bank
172,400 Branch bad debt 55,400
Branch discount allowed
Balance c/d 87
200,500

Branch bank BRANCH EXPENSES
HQ Bank RM
18,200 Branch profit & loss
Branch expenses 8,500
Branch discount 26,700
Branch bad debt
HQ Profit & loss BRANCH PROFIT AND LOSS
RM
26,700 Branch stock-Gross profit
2,000
500
26,200
55,400

5.2.1.2 Integrated Accounting Using At Selling Price

 When good sent to the branch are charged at cost, the head office has no control
over the branch stock because the stock shortage at the branch cannot be
detected.

 This is because the stock balance at the branch cannot be derived from the
Branch Stock as it records the stock movement at cost and sales value.

 Therefore, the good sent to the branch are charged at selling price.
 All goods received and issued at the branch will be recorded in Branch Stock

Account at selling price.
 Branch stock account becomes a stock account that recorded at selling price and

its balance reflects the stock balance at the selling price.

BRANCH STOCK ACCOUNT

Balance b/d –opening stock at xx Good sent to branch (good xx
xx
selling price returned at selling price) xx
xx
Good sent to branch (at selling xx Branch debtor (credit sales at

price) selling price)

Branch debtors-good returned from xx Branch bank/cash(cash sales at

branch debtors at selling price selling price)

xx Balance c/d-closing stock at

selling price

 Closing stock at selling price can be reduced to closing stock at cost by using
the formula

Closing stock at cost = closing stock at selling price x 100
100mark up %

 Profit elements in the sales value of all good received and issued at the branch
will be recorded in Branch Stock Adjustment Account which shows the gross
profit of the branch.

 The profit included in the sales value of all goods sent to the branch shows the
potential gross profit that can be earned by the branch if all the goods were
sold.

 On the other hand, the profit included in the sales value of the goods returned
from the branch shows the reduction of potential gross profit at the branch.

 At the end of the accounting period, if some goods were still unsold, the actual
gross profit realized(earned) would be the maximum potential gross profit less
the profit included in the goods unsold (closing stock).

 The profit included in the closing stock is unrealized profit.

88

 The profit for unrealized profit for closing stock will be shown in the Branch
Stock Adjustment Account as balance c/d (profit to be realized in the next
period when the stocks are sold.)

BRANCH STOCK ADJUSTMENT ACCOUNT xx
Goods sent to branch account – profit xx Goods sent to branch account- xx

included in sales value of goods profit included in sales value

returned of goods sent

Branch Profit & Loss account- gross xx

profit (balancing figure) realized xx
Balance c/d – profit included in the

sales value of closing stock (unrealized

profit)

xx

Journal Entries xx
xx
i. Goods sent to branch from HQ
Dr Branch Stock
Cr Goods sent to branch

(With sales value of good sent)

Dr Goods sent to Branch xx

Cr Branch stock adjustments xx

(With profit included in the sales value of good sent)

ii. Goods returned from branch to HQ xx
Dr Goods sent to branch xx
Cr Branch stock
(With sales value of good returned)

Dr Branch adjustment account xx

Cr goods sent to branch xx

(With profit included in the sales value of good returned)

iii. When goods are sold xx
Dr Branch stock debtors/branch bank xx xx
Cr Branch stock
(With sales value of good sold on credit/cash)

iv. When goods are returned from branch debtors

Dr Branch stock xx

Cr Branch debtors

(With sales value of good returned) 89

Example 2

On 1 January 2016, Mak Cun Sdn Bhd , based in Penang set up a new branch in Seremban,
Negeri Sembilan. HQ sent goods to the branch with the markup value of 25%. The following
information shows the transaction between HQ and the branch during the year ended 31
December 2016:

Goods sent from the head office at selling price RM
Goods returned to head office at selling price
Credit sales 250,000
3,000

190,000

Prepare relevant accounts

Good sent to branch BRANCH STOCK ACCOUNT RM
RM 190,000

250,000 Branch debtors 3,000
Good sent to branch account 57,000
Balance c/d 250,000

250,000

Branch stock account GOOD SENT TO BRANCH RM
Branch stock adjustment 600
RM
Trading account (HQ) 3,000 Branch stock adjustment 250,000
50,000 Branch stock
250,600
197,600
250,600

BRANCH ADJUSTMENT ACCOUNT

RM RM
50,000
Good sent to branch 600 Good sent to branch
38,000 (RM250,000 x (25/125) 250,000
( RM 3,000 x (25/125)
Branch profit & loss –Gross

profit (balancing figure)

Balance c/d 11,400

(RM 57,000 x (25/125)

250,000

90

5.2.2 SEPARATE ACCOUNTING SYSTEM

 HQ is required to keep records of their own transactions and the branch also
need to maintain their own records

 The treatment for record account between headquarters and his branch, the
transaction will be treating similar with creditor and debtor concept.

 Headquarter will be as a supplier and sent the goods to the branch as a debtor.
 Ledger Accounts Maintained By Autonomous Branches Under Head office

Book And Branches Book

Table 5.2.2 Items in Head Office Book and Branch Book

Head Office’s Book Branch’s Book

HQ sent goods to branch Dr Branch Current Account Dr Goods received from HQ

Cr Goods sent to Branch Cr HQ Current Account

HQ paid the expenses Dr Expenses No record

Cr Cash / Bank

HQ paid the branch expenses Dr Branch Current Account Dr Expenses

Cr Cash / Bank Cr HQ Current Account

Branch transfer cash to HQ Dr Cash Dr HQ Current Account

Cr Branch Current Account Cr Cash

Branch debtor paid to HQ Dr Cash Dr HQ Current Account

Cr Branch Current Account Cr Debtor

Branch received payment No record Dr Cash

from debtors Cr Debtor

 For conclusion, the HQ current account and Branch current account will relate if
there has transaction between them, Head Office and Branch.

 For record purposes, the account related with supplier is a Headquarter Current
Account (creditor) and ledger for branch is Branch Current Account (debtor).

 Branch will maintain Head Office Current Account to record all transactions
dealing with its head office.

 The record as similar as an ordinary transaction. In this topic, the scope is limiting
for adjustment only, which the focus more on closing the transaction.

 Below are the items content in each ledger.

In Head Office’s Book

BRANCH CURRENT ACCOUNT

Balance b/d RM RM
xx Cash – received from branch xx
Good sent to branch xx Cash in transit xx
Profit & Loss – Transfer to xx
Good in transit
Branch xx
xx

xx Balance c/d

91

In Branch’s Book

Balance c/d HEAD OFFICE CURRENT ACCOUNT xx
xx
xx Bal b/d xx

xx Good received from HQ xx
xx Profit & Loss – Transfer

To Head Office

xx

5.2.2.1 ADJUSTING ENTRIES ON THE CLOSING DATE OF ACCOUNTING
YEAR

 The balances of the Branch Current Account recorded in the Head Office
Ledger and Head Office Current Account in Branch ledger should be equal
but only different in opposite sides.

 However, the balances of the 2 accounts can be different due to:
i goods in transit
ii cash in transit
iii receipts/payments by the head office for the branch

i. Goods in transit

Head Office sent goods to branch but the goods were not received by the
branch during the accounting period. The goods were received after the
accounting period.

For goods in transit to the branch (goods sent to the branch)
Dr Goods in transit account
Cr Branch current account

ii. Cash in transit

a) The Branch sent cash to the HQ and made a record of it but the cash
was not received by the HQ during the accounting period.

For goods in transit to the head office
Dr Cash in transit account
Cr Branch current account

b) The HQ sent cash to the branch and made a record of it but the cash
was not received by the branch during the accounting period.

For cash in transit to the branch

Dr Cash in transit account
Cr Branch current account

92

iii. receipts/payments by the head office for the branch
a) Branch expenses paid by the head office, not yet recorded by the
branch
Dr Relevant expenses account
Cr Head Office current account

b) Cash received by the head office from the branch debtor
Dr Head Office current account
Cr Branch debtors current account

5.2.2.2 PROVISION FOR UNREALIZED PROFIT
 In separate accounting system, the head office may send the goods to
branch at cost plus mark-up.
 Unrealized profit will exist for mark-up situation, if there have closing
stock.
 The mark up on goods that left unsold at the branch on the closing date of
accounting year is the unrealized profit for the year.
 Therefore, at the end of accounting year, adjustment need to be made in
the head office ‘s book by transferring the unrealized profit attributable to
those good left unsold from profit and loss account to the Provision for
Unrealized profit.

In the head office’s book
Dr Profit & loss account
Cr Provision for unrealized profit

Unrealized profit = Total mark – up for stock at the branch

Transfer price of the stock x mark – up %
100 + Mark – up %

*transfer price = invoice price

Increased/ decreased in the provision for unrealized profit

 In case of a branch which has opening stock as well as closing stock, the
provision for unrealized profit will be calculated by taking into account the
provision which had been made for the opening stock in the previous year.

 For instance, the provision for unrealized profit for opening stock is
RM2,450 and the provision required is RM3,000.

 Only increase in the provision RM550 needs to be provided in the profit &
loss account. The adjustment is exactly the same as that for doubtful debt.

93

5.3 PREPARATION OF FINAL ACCOUNTS

 Preparation of Statement of Comprehensive Income and Statement of Financial
Position for the head office and branch will be done in column.

 In case where the goods are invoice at transfer price (cost plus mark up), it should not
be deducted from the purchases as goods sent are valued at transfer price whereas
purchase are at cost.

 The transfer price of the goods sent to the branch should be treated as the sales to the
branch and it should be shown as such in the head office trading account.

FORMAT

Statement of Comprehensive Income Combined for the year Ended 31 December

2016

HQ BRANCH COMBINED

(RM) (RM) (RM)

Sales 1xx 1xx 2xx

Goods to the branch xx 2xx -

xxx xxx xxx

Less: Cost of goods sold 1xx 1xx 2xx
Opening stock xxx xxx xx
Purchases xx xx xx
Goods from head office xx xx xx
xx xx xx
Less : Closing stock xxx xxx xx
Gross profit
Less : Expenses xx xx xx
xx xx xx
Provision for unrealized profit xx xx xx
Depreciation – furniture xx xx xx
Administration expenses xxx xxx xx
Sales distribution expenses
Net Profit

94

Statement of Financial Position Combined for the year Ended 31 December 2016

NON CURRENT HEAD OFFICE BRANCH COMBINED
ASSETS (RM) (RM) (RM)

Land xx xx xx
Furniture xx xx xx
Less) accumulated (xx) xx (xx) xx (xx) xx
depreciation
xx xx xx
CURRENT ASSETS
Closing stock xx xx xx
Trade receivebles xx xx xx
Branch Current Account xx xx xx
Bank xx xx xx

CURRENT xx xx xx
LIABILITIES 2xx 2xx 2xx
Trade payables
HQ Current Account xx xx xx
xx xx xx
NON CURRENT
LoIAanBILITIES xx xx xx

xx xx xx xx xx

FINANCED BY xx xx xx
Retained earnings xx xx xx
Net profit
2xx 2xx
2xx

95

Example 1

The following are the trial balance of Mamadill Sdn Bhd and its branch as at 31 December
2016

Fixed asset at net book value Head office branch
Stock 1/1/2016 Dr Cr Dr Cr
Share capital RM RM RM RM
Share premium 90,000 30,000
Purchases 85,000 23,200
Sales
Good sent to branch at invoice 229,000 300,700
price 40,000
Administrative 910,000 22,500
expenses(including 835,000 274,000
depreciation for the year) 283,504 5,596
Selling and distribution 23,000
expenses 40,000
Good received from head 378,296
office 94,000
Bank
Debtors 126,004 55,000 30,600
Creditors 52,000 23,800 46,996
Profit & loss account 378,296
Current account 71,500 2,000
Provision for unrealized profit 1,468,504 1,468,504

Additional information
a) Head office supplies goods to the branch at cost plus 10% mark up
b) Stocks at 31 December 2016

Head office RM66,000 (cost) ; Branch RM22,836 (invoice price)
c) Good invoiced at RM9,504 by the head office to the branch were transit at 31 December

2016 and a remittance of RM15,000 from the branch was received by the head office only
on 1 January 2017.

Required;
i. Prepare Statement of Comprehensive Income Combined for the year Ended 31
December 2016 and Statement of Financial Position Combined as at 31 December 2016
ii. Show branch current account

96

ANSWER

Statement of Comprehensive Income Combined for the year Ended

31 December 2016

HQ BRANCH COMBINED

RM RM RM RM RM RM

Sales 835,000 300,700 1,135,700

Good sent to the 283,504 -
branch 1,118,504 1,135,700

300,700

COGS

Opening stock 85,000 23,200 106,200 W1

Purchases 910,000 910,000

Goods received 274,000
from HQ

995,000 297,200 1,016,200

LESS :

Closing stock 66,000 22,836 95,400 W2 920,800

929,000 274,364

Gross profit 189,504 26,336 214,900

Less: 940 W3 22,500 40,000
Provision for
unrealized profit 40,000 22,500 116,500
Administrative 3,836
expenses 94,000 156,500
Selling & - 58,400
distribution 134,940
expenses 54,564 - -
3836
Net profit 23,800
Branch profit 23,800 82,200
transfer 82,200
Retained profit b/f

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